Joint approach wins landmark receivership judgement

US, English and offshore law firms have worked closely together to bring a landmark receivership case to the Royal Court of Guernsey in a $121m international securities fraud scheme.

Simon Davies, partner and head of litigation of the Guernsey office at Ogier, one of the world’s largest, leading offshore legal and administration service providers, acted on behalf of US attorneys DurretteBradshaw, and its receiver Roy Terry, along with Paul Clements, partner and head of the dispute resolution department at English solicitors Rooks Rider, to recover the assets of Vavasseur Corp, a company incorporated in the Bahamas to hide money swindled from investors through out the world.

It is the first time a US receivership of a foreign company has been recognised in Guernsey, setting a precedent for all common law jurisdictions.

Vavasseur was controlled by Terry Dowdell who managed an international fraud scheme which raised as much as $121 million from investors in the United States and Europe through the sale of fictitious securities.

Funds fraudulently obtained from investors were traced to a number of jurisdictions including the US, Channel Islands, the British Virgin Islands and Ireland.

As receiver of the assets Roy Terry of DurretteBradshaw is acting to recover funds owing to investors defrauded in the scheme. He instructed English solicitors Rooks Rider who appointed Ogier to seek recognition in Guernsey of the US receivership order in order to be able to seek recovery of monies lodged in certain bank accounts in Guernsey, which accounts were in the name of Vavasseur.Receiver Roy Terry notes: “Our appointment order directs that we recover assets wherever they are found. What has made this effort especially complex is the interplay of law from the various jurisdictions. Proceeding in Guernsey has involved not only gaining familiarity with Guernsey law, but also with relevant laws of the US, UK and the Bahamas.”

Under the current state of Guernsey corporate law, the concept of receivership is restricted to a few very specialist fields. In no previous case had the Guernsey courts ever recognised a receiver appointed by a foreign court. In order to do so, the Court relied on applicable English law, which revolved around a somewhat unsatisfactory 1975 English judgment.

This judgment is a clear demonstration that the Royal Court of Guernsey will not tolerate those who attempt to misuse the financial services industry in Guernsey for illegal or improper purposes. As a result, the receivers of Vavasseur will be able to provide a more substantial recovery to the true victims of the fraud.

It is to be hoped that the legal obstacles that the Royal Court was able to overcome will lead to other common law jurisdictions taking the same modern approach to comparable cases. The decision will be welcomed by legal and insolvency practitioners alike and it is to be hoped that the decision will set a new international standard which is likely to be upheld for years to come.

Paul Clements, head of dispute resolution at Rooks Rider, commented that: “This was a highly complex factual situation in an area of great legal uncertainty and complexity. Despite the political consensus amongst western governments since 9/11, that asset tracing in criminal cases should be made easier, most legal systems have historically put real obstacles in the way of asset recovery. It is in this, vital, area, that this case has achieved such a breakthrough.”

Ogier has subsequently been successful in obtaining a remittance order from Guernsey's Royal Court so that funds can be paid over to DurretteBradshaw.

Under current Guernsey corporate law, the concept of receivership is restricted to a very few specialist fields, notably Protected Cell Companies.

The milestone court ruling for Ogier and Rooks Rider has allowed DurretteBradshaw access to the $2.65 million of frozen funds from Vavasseur that are currently held in a Guernsey bank.

Advocate Davies of Ogier Guernsey, confirmed that: “Guernsey's Royal Court ruling on a US receivership is a major development in the Vavasseur matter. It will be welcomed by legal and insolvency practitioners alike and will assist those seeking to repatriate assets which are proceeds of fraud to innocent victims for years to come which is likely to be held up as a precedent for years to come”.

The leading English case in this area is Schemmer and Others v Property Resources Limited [1975] Ch 273, a decision of Goulding J. in the English High Court.In that case a receiver was appointed by the United States District Court for the Southern District of New York to take possession of the assets of a company incorporated in the Bahamas.On the facts of that case as they were presented to him, Goulding J held that there was no “sufficient connection” with the jurisdiction of the US Court such as to entitle the English Court to justify recognition of the appointment of the receiver.He further held that the 1934 Act was a penal statute and, in the absence of legislation founded on a treaty, unenforceable for that reason in the United Kingdom.

As far as the concept of “sufficient connection” was concerned, Goulding J held that there was clear authority to support the proposition that an English Court would recognise the appointment of foreign receivers where the country of incorporation of the company was the same as the jurisdiction in which the receiver was appointed, or where the company had submitted to the jurisdiction of a foreign court.Goulding J further considered, although he expressed no view as to materiality of these circumstances, that it might be relevant to the question whether a sufficient connection exists if the appointment of the receiver would be recognised by the courts of the country in which the company was incorporated and if the order appointing the receiver was made in a country where the company had its central management and control or was where the company carried on business.

The receivers in this case could not bring themselves within the terms of the first two propositions.Therefore they had to rely on Goulding J’s further suggestions.

Citing the latter two limbs of the Schemmer test, supported as these are by eminent commentators, the receivers adduced affidavit evidence that Dowdell had been the central mind and management of Vavasseur, which had conducted its operations from Charlottesville, Virginia.They also supplied the Royal Court with expert legal opinions to the effect that the appointment by the US Court or for themselves as receivers over the assets of Vavasseur would be recognised in the Bahamas and in the United Kingdom.The Bahamas opinion further noted that, since Vavasseur was an International Business Company, and therefore required to carry on its business outside of the Bahamas, there would be no reason for the Bahamian Courts to become involved in the receivership.

As to the civil or criminal nature of the receivership, the receivers produced evidence that the main purpose of the receivership is to compensate defrauded investors. While the SEC’s judgment against Vavasseur includes a civil penalty, investors must be reimbursed the full amount of their principal invested before any payment toward the penalty can be made.The receivers demonstrated that no prospects exist for recoveries sufficient for the full payment of investors.Also, since assets recovered from Guernsey will be deposited into an account jointly held by the US receivers with the UK liquidator pursuant to the Cooperation Agreement, it is virtually impossible to conclude that a recovery action in Guernsey is anything but civil and compensatory in nature.

On the facts, the Deputy Bailiff of Guernsey was satisfied under the principles set out in Schemmer that the Royal Court had the power to make a recognition order and that this was an appropriate case in which to do so.This is believed to be the first occasion on which the Schemmer decision has been deployed before a British jurisdiction in order successfully to obtain the recognition of a United States receivership over a non-US company.As such it will be welcomed by legal and insolvency practitioners alike and is a major advance in the Vavasseur receivership.